In late November 2012, I wrote of the positive catalysts coming for Magnum Hunter Resources (MHR). With the stock at $3.92, I told readers it was only a matter of time before this stock was much higher, as a sale of the Eagle Ford assets, a new natural gas processing plant from MarkWest Energy Partners (MWE), and test wells in the Utica all provided events that could send shares towards double digits. So with shares trading in the $3.90's as of early April 2013, essentially flat from the last article, what happened to all this potential?
First and foremost, as of this writing, the company is undergoing an audit, as it tries to straighten out some internal accounting issues. Management has assured investors that the ongoing delay in the filing of its 10-K is the result of all the acquisitions the company has done in the last few years, with the internal accounting department not growing fast enough to handle the workload, in addition to some deficiencies with internal controls. As of this date, it does not appear this event will lead to any sort of legal actions, and the March 18th Update Call said that a full annual report will be filed "soon." (More on MHR's liberal use of deadlines later.) The bank lenders to MHR have given the company the waiver the company asked for, so that gives me some comfort that this issue isn't a reason to dump the stock. However, until the company gets the 10-K filed, and gets out from under this cloud, it will likely weigh on the shares, as investors take a wait and see approach to buying.
Aside from that delay in the 10-K, management at Magnum Hunter seems to have a case of either being overly optimistic, or flat out awful at issuing time frames. The MarkWest processing plant, scheduled to be completed in late November or early December, actually did not come online until late December. I'm not sure you can blame MHR for this, but its frustrating to have the date drift that far off course. To add to the delays in the Marcellus, the company's midstream division had to re-work some of the pipes, due to an unexpectedly wet gas stream. While this should be a plus, since wet gas means higher prices, the company had trouble getting air permits for one of its two compressor stations, so roughly 2,500 Boepd was suppose to be shut in until this week. Again, regulatory issues are not fully to blame on the company, but the more excuses I hear, the less I blame bad luck. I've seen no announcement that the permit was granted and that gas is flowing again, so I'm not sure if this is the case. I assume this issue will be resolved soon, and don't consider it material to the company going forward.
Moving to the Utica, delays continue. The pad site for the Utica test wells, which will be used to drill a total of 16 wells, was not completed on time, as management cited weather related delays. The weather in the Northeast has been bad in March, with several snow storms, so this was to be expected. I can't hold management accountable for the weather, and IR has told me Utica test results are expected to be out slightly after mid-year. According to an interview with Jim Cramer done Wednesday night, MHR is spudding on the drill site next week, so hopefully the delays are behind them. The Utica results could be huge for the stock, as results from Gulfport (GPOR) and PDC Energy (PDCE) have helped send shares of both those stock much higher, with shares of those companies up 18%, and 45% year to date.
On a positive note, the sale of the Eagle Ford acreage, which has been on the block for several months, was finally announced Wednesday, with Penn Virginia (PVA) agreeing to pay $401 million for 19,000 acres, representing 3,200 barrels of oil a day of production. This money will be used to pay down the bank debt, and redeem some of the preferred shares outstanding. The company also announced that it is participating with Marathon Oil Corporation on a horizontal well targeting the Pearsall Shale in Atascosa County, on the remaining 7,000 acres Magnum Hunter owns in the Eagle Ford. Those acres are likely still on the auction block, but it would make sense to see how the well with Marathon produces before selling the acreage.
The news Wednesday was good for a 10% rally in shares of MHR, before pulling back with the rest of the market, to finish up 3.15%. So in the four months since I recommended the name, the company has had a missed filing deadline, a sale bringing in cash equal to 25% of the enterprise value of the whole company, some delays due to permitting and weather, and the stocks gone nowhere. The May 5 calls I recommended a few months back look like they'll be a loser without help from some unknown event. An all clear from the accountants might get the stock moving higher, but I can't predict when that will happen. A report out from Ohio about well results in the next few days could also provide a pop, but again, I'm not sure. The next major catalyst should be the Utica results, hopefully around mid-July. By then, the firm should have simplified the balance sheet some, hopefully gotten the accounting issues behind them, and the Marcellus wells should be back online and running through the Eureka Hunter pipeline system. However, given the propensity for delays Magnum Hunter seems to have, I'm done trying to time the stock. Investors looking to profit from the potential of the Utica wells should buy the stock, under $4, and wait for the upside. It's been an interesting few months for the name, but I still think its a $10 stock in two years. Investors with a strong risk tolerance, and stomach, should get in now.
Additional disclosure: Also long MHR Calls